(Kitco News) - The copper market is seeing some renewed volatility, but analysts note that a perfect storm continues to churn, as growing demand and dwindling supplies could push prices to record highs later this year.
At the start of the week, July high-grade copper futures rallied to $4.6945 per pound. However, near-term momentum has shifted as prices have dropped to initial support at $4.50 an ounce and are down nearly 4% from their recent two-year highs.
Some analysts have noted that the drop in price is not surprising as investors take some profits off the table. Even with the 4% drop, copper prices are up more than 21% since its lows in mid-February.
Analysts have been warning of a potential pullback as the copper rally has been driven primarily by speculative interest. Adding to the correction is growing concern that Chinese copper supplies are increasing due to weakening demand as economic activity remains soft.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said copper stocks monitored by the Shanghai Futures Exchange have recently surged to 300,000 tonnes. Inventories are at their highest level in four years when demand collapsed because of the global COVID-19 pandemic.
“Some of the increase is likely to have been driven by traders, hoarding metals in order to seek a hedge against the possible risk of a weaker yuan, but overall, it does not support higher prices in the short term,” Hansen said in a note. “Until we see an improvement in the mentioned data, the potential for a period of consolidation, perhaps even a deeper correction seems increasingly likely.
Commodity analysts at Bank of America are also paying close attention to China’s copper supply. Although inventories have been rising, the analysts noted that, looking at the bigger picture, they are still at multi-year lows. However, they added that it could take a few more weeks before traders get a complete picture of inventory levels, which could keep prices restrained in the near term.
“For the next leg higher, both SHFE and bonded inventories need to decline; during COVID, inventories increased until mid-May, and we would consider this as the latest possible turning point to confirm fundamental support to the recent rally,” the Bank of America analysts wrote. “Sticking with weak physical markets, the latest LME commitment of traders report confirms that the rally has been driven by investors, with commercial long position as a share of open interest declining. Is this a concern? Absolutely, and it takes us back to how important it is that physical markets confirm the rally.”
While copper prices could struggle in the near term, some analysts have said that they see dips as buying opportunities as market fundamentals point to higher prices.
In recent interviews with Kitco News, Robert Minter, Director of ETF Strategy at abrdn, said that he has been bullish on copper for a while as investors have underpriced global economic activity and the impact the green energy transition is having on demand.
He added that he expects the world is seeing the start of a new commodity supercycle that will be led by copper and industrial metals and also propel gold and silver prices higher.
In their updated copper outlook, commodity analysts at BCA Research said that their supply and demand model points to a physical refined copper deficit of 370,000 tonnes this year as demand continues to outstrip supply.
While BCA looks for prices to end the year around $4.50 per pound, the analysts expect to see elevated volatility.
“Geoeconomic fragmentation will exacerbate copper price volatility. The rush to build new supply chains to de-risk home economies from over-reliance on economically hostile states already is apparent on all sides,” the analysts said.
Despite the near-term correction, Hansen said he maintains a long-term bullish outlook on copper.
“Overall, we maintain a long-term positive outlook for the metal in anticipation of robust demand from among others towards electric vehicles, grid infrastructure and AI data centers at a time when production from existing miners looks set to fall in the coming years.”
In its updated price forecast, the World Bank expects to see a relatively moderate price increase of 5% this year.
“Global demand for copper—a key input for construction and equipment manufacturing— is likely to increase only modestly this year, reflecting subdued global GDP growth and the protracted challenges in China’s real estate sector,” the World Bank said in its report.
